Alarming Silver Technicals

Commodities and commodities-stock speculators have had quite a rough-and-tumble
last full month of summer. In a season where the markets typically hold traders
in a mire of malaise, various extraneous events have awoken the volatility
beast making for an exciting August.

With general stocks retreating from record-high levels in mid-July, commodities
stocks have transcended general stock losses and have temporarily bucked the historically-inverse
correlation with general-stock bears. Precious-metals-stock traders in
particular have endured a session of wailing and gnashing of teeth. Key tactical
support levels of the venerable HUI gold-stock index were sliced through like
a warm knife through butter.

But though the commodities stocks have taken some abuse of recent, this fearful
selling is seemingly just shaking out the over-leveraged and weak-handed traders.
Far too often traders forget that volatile consolidations are par for the course
within commodities bulls. All this activity might just be the final rebalancing
of sentiment so a powerful new upleg can emerge.

Now though in the last six weeks or so this mini-stock panic has looked like
the end of the world for some, the performance of most of the underlying commodities
was nowhere near as bad. But the behavior of one commodity in particular, silver,
has really riled up many traders.

While gold has weathered this recent stock-market maelstrom rather well, silver's
erratic behavior has prompted a number of its long-faithful investors to question
its steadfastness. Frankly I was shocked to see some of the wild commentary
and distraught inquiries into the supposed perils of this white metal. Let's
take a look at what this fuss is all about.

This first chart displays the 2007 performance of gold and silver using daily
closing data. As you can see gold has done just fine so far this year showing
strong support off its 200-day moving average. The Ancient Metal of Kings is
still in the midst of a textbook-perfect uptrend off of its October 2006 low
under $570 and has powered 23% higher to its highs earlier this year.

But looking at this chart, the "as goes gold so goes silver" mantra hasn't
quite played out of late. And this is why silver traders are up in arms. All
this commotion does surprise me though, as experienced and battle-hardened
silver traders should understand the white metal's fickleness compared to gold.

Regardless, this short-term chart has many folks scratching their heads. And
the apparent technical breakdown of silver over the last several months has
miffed even some of the silver elite.

Now the undulations of gold and silver are nearly identical from a quick visual
glance, especially if one data set is transposed directly over the other. The
differences on both the flows and the ebbs though are in the extremes, when
prices move sharply in either direction. And silver's extremes have given its
trend a whole different look than gold's.

Whereas gold has been trending up bouncing off its 200dma, silver has been
in a six-month downtrend. It has actually spent much of the last couple
months at prices below its 200dma. And where gold is currently trading
above where it began the year, the price of silver is lower than its
opening price.

Even more alarming to silver traders is the depth to which its price had recently
fallen below its key 200dma. As measured by percentage, it was the lowest point
in its entire bull! Silver's relative weakness has got a lot of attention recently.

This first very-short-term look at silver can indeed paint a somber picture.
But the picture that short-term analysis sometimes paints may not always depict
prevailing strategic realities. Even the most beautiful cities in the world
have slums. But if a slum is the first part of a city you view, the rest won't
pique your interest. Perhaps all you need to do is stroll down the street in
order to change this initial opinion.

If we zoom out a little and take a look at silver over the last 18 months,
things don't look as bleak. This next chart captures silver's bull-to-date
high achieved in May of last year. And this latest and most powerful upleg
that vaulted the price of silver to nearly $15 occurred in impressive parabolic
fashion.

Though futures and stock speculators that were long during this parabola saw
legendary gains, those that didn't heed the overbought warning signs were quick
to lose much of these gains during the imminent and sharp correction to follow.

At Zeal we rode much of the 2005/2006 upleg and scored fantastic gains for
ourselves and our newsletter subscribers. But much to the chagrin of the metals-markets
perma-bulls, we
saw the writing on the wall for an imminent correction. A correction that
was necessary in order to stay the integrity of silver's awesome secular bull
and shed excessively greedy sentiment.

And of course the downside of a parabola is never pretty. Parabolas tend to
breed equally sharp movements to the downside. And this sharp correction took
silver to its June 2006 low under $10, a 35% loss in just 23 trading days.
Stocks of course fared much worse.

After this sharp correction it was common perception that silver would either
begin its next upleg off its major interim low or enter into a consolidation
phase. A sideways consolidation would simply bleed off the resonating euphoria
from the previous massive upleg.

Well for a period of about 8 months, it looked as though silver was off to
the races as it carved a beautiful upward trend that in late February brought
it to within 2% of its bull high less than a year earlier. But in late February
the metals and stocks hit a wall, with the Chinese stock-market selloff acting
as a catalyst.

Timing-wise, this Chinese stock selloff seemed to mark a turning point for
silver. Its uptrend broke and it soon formed a downtrend that we seem to still
be in today. But though silver's initial uptrend from its June 2006 low indeed
broke, it is important to view this in context and seriously consider the time
horizon in question.

This upward trend channel was young, only 8 months old. And support on a less-than-one-year-old
trend channel is not only non-secular in nature, but it lacks foundational
strength. So giving a different look to this chart, the 8-month uptrend and
6-month-old downtrend can indeed be combined to form a 14-month consolidation.

As of now this consolidation could be drawn as an ascending wedge, illustrated
by the transparent red lines. If silver was to drop further though, the support
and resistance lines could simply be redrawn to form a horizontal trend channel
illustrating a sideways consolidation. And there is quite a bit more wiggle
room before silver approaches its major interim low under $10.

Again, it is important to consider this consolidation in the context of time.
Though a 14-month consolidation is no fun for investors, let's zoom out yet
again to get an even bigger picture of today's consolidation and see how it
strategically fits into silver's entire bull.

Charts indeed provide an excellent visual of market conditions, and technical
analysis is very useful on many levels. But no two analysts will paint the
same exact picture. Charts can be interpreted many different ways and lines
can be drawn at various slopes depending on the message that is trying to be
relayed.

When I look at the big picture of our silver bull to date, I see two massive
uplegs capped by parabolic ascents. And these uplegs are followed by two long
periods of consolidation led off by sizeable corrections.

The first massive upleg took silver to heights it had not seen since the late
1980s. And after silver reached its 2004 apex just over $8, a long consolidating
wedge was formed that lasted for about 18 months before it finally broke out
to the upside.

Several times during this 18-month consolidation silver knifed through its relative support
zone, or below its 200dma. Relativity is a trading tool we use at Zeal that
simply measures where silver is trading relative to its 200dma. I encourage
you to read up on relativity if
you are not familiar with it.

Now in bull markets, prices tend to soar above their 200dmas in uplegs and
retreat to their 200dmas in corrections. This action causes the 200dma to rise
on balance during the bull. And even during this 18-month consolidation higher
lows indeed caused the 200dma to rise as the price of silver remained high.

Occasionally silver dipped below its 200dma and relative support zone, but
as you can see this never lasted too long. Even as silver consolidated to bleed
off the greed and prep for the next upleg, its price remained high compared
to its lows in previous years. The sub-$5 grind in the years leading up to
this upleg were history, as silver's average price throughout the course of
this first long consolidation was nearly $7.

These continually rising prices and a rising 200dma cemented the case that
silver had followed gold and entered into a secular bull market. This was further
reinforced as silver entered into its second massive upleg toward the end of
2005. And this latest upleg was something to behold. The price of silver more
than doubled in just 7 months leading to its May 2006 peak near $15!

Well 14+ months later, our current consolidation is starting to look eerily
familiar to the previous consolidation that led up to this latest massive upleg.
From this higher-level view, I was able to reshape the support and resistance
lines from the previous chart and draw a wedge similar to the 2004/2005 consolidation.

Again, today's support failure is not the first time in this bull, or even
consolidation, that it has happened. Now the extreme piercing of support I'll
admit does warrant some chatter. Panic selling a couple weeks ago brought rSilver
to a low point of 0.88, or 88% of its 200dma. This is obviously the lowest
point in this entire bull, trumping the previous low achieved in May of 2004.

But what does this new rSilver low truly mean? Does it mark the end of this
bull market? Is it time to sell? I don't think so! First, let's consider where
silver is today. Now judging by the prevailing sentiment, you'd think it was
trading at $5 an ounce again. But close to $12 today, silver is still at levels
that were unthinkable just a few years ago.

Even looking at this chart you can easily see that this consolidation is flagging
on the high side of this latest massive upleg. This is testament alone that
the bull is not over. On top of this, silver today is still 170% higher than
its 2003 lows and 43% higher than the high from its previous upleg.

Just like gold, silver is still in the first half of a secular bull market
that should see it go much higher. I don't know how this lengthy consolidation
will turn out or when the next massive upleg will begin, but this recent break
in relative support does not damage the integrity of the bull.

Ultimately silver and silver-stock speculators should have come to accept
volatility by now. This white metal is by far the more volatile of the PMs
as it lies in a speculators' market. Its market is less than a fifth the size
of gold, so it doesn't take a lot of capital to move this metal in either direction.

From a fundamental perspective there have been no structural changes to silver's
smashingly bullish fundamentals. In fact, silver's fundamentals should continue
to buttress the future of this volatile metal and the stocks that will bring
it to market today and tomorrow.

Silver's fundamentals today are ultimately the same as they were when its
bull began. Suppliers continue to struggle to meet market demand and silver
investment continues to rise. In fact, its indispensable industrial applications
are still seemingly immune to rising prices. This of course makes sense since
only small amounts of silver are used per unit of a finished product. The silver
cost per unit is usually trivial compared to total manufacturing costs.

This is supported by a recent GFMS study
that marked 2006 as the fifth consecutive up-year for silver's use in industrial
applications. This was led by both China and Japan showing greater than 10%
year-over-year growth with the US up an impressive 6%. And this all comes on
the heels of the major industrial opposition to last year's launch of the famed
silver ETF.

SLV has proven to be wildly successful for this silver bull since it went
live last spring. So much so that this ETF was a big catalyst to the flurry
of speculative excitement that gave fuel to silver's parabolic rise.

The opposition to SLV was afraid that an ETF would reduce the silver on the
market and cause prices to rise. In a sense they were right, but the reason
their opposition was thwarted by the SEC simply boils down to their selfish
ambitions, they want cheap silver. Silver is indeed an industrial metal, but
the successful launch of this ETF proves that its precious aspect should
not be taken for granted.

The success of SLV has shown that there is a wider market for silver as an
investment than originally thought. Since its custodian's initial silver investment
of about 21m ounces in April of 2006, the amount of silver in trust has grown
to greater than 141m ounces. This is an incredible increase of 570% in just
over a year since this ETF went live!

Another report out of GFMS really bolsters silver's fundamentals. This report
identifies 10-year growth for world silver fabrication through 2005 of 37%
for industrial uses and 61% for coins. And though it shows silver's use in
photography down by 22% over this time, there are some interesting facts that
come out of this.

Most interesting is that 2005 marked the first time that silver demand for
jewelry was greater than its demand in photography. This is important because
60% of the silver used in photography is recycled, whereas a very small amount
of silver is recycled from jewelry. Steady jewelry demand and shrinking photography
demand can be spun in positive fashion. And because of the differing recycle
rates, this trend could end up creating more overall demand for silver.

So with silver's still-excellent fundaments and a technical picture that is
not as scary as people think, opportunities still abound for investors. And
I believe silver stocks remain the best vehicle for speculation and investment.
The explorers, developers and producers tasked with bringing this metal to
market offer spectacular leverage to the price of their underlying metal.

But since three-quarters of the silver that comes to market is just byproduct
revenue for some of the major global mining conglomerates, it is the other
one-quarter that comes from primary silver companies that warrants our capital.
These primary silver companies are what stock traders can use to directly leverage
silver. They live or die by its secular price trends.

With the abuse that the commodities stocks have taken of recent, silver stocks
in particular, there are now excellent buying opportunities available to layer
in for the next run-up in silver. At Zeal we periodically publish research
reports that among many things help feed our newsletter trades.
And this spring we published a report profiling our 20 favorite silver stocks.

In this report are detailed fundamental profiles of the silver stocks we believe
have the highest probabilities-for-success to prosper in silver's next upleg.
Many of these stocks have been sold off with the markets and are now at or
near oversold technically opportune buy points. If you would like to have this
valuable report at your fingertips please
purchase it today.

The bottom line is though silver appears to be weak, especially compared to
gold, this shouldn't come as a surprise due to its hyper-speculative nature.
Even with silver in the midst of a mini-downtrend and relative support at a
bull record low, there is still no reason to panic.

The uptrend and downtrend that have followed the major interim low off silver's
May 2006 top should be considered in strategic context. These separate trends
are turning out to just be tactical noise in what is panning out to be a long
consolidation similar to the one following silver's first major upleg.

Investors now have the opportunity to become true contrarians and deploy speculative
capital into the much-feared silver-stock environment. If silver's last two
uplegs and consolidations tell the story of what is to come, then legendary
gains could be just around the corner.

So how can you profit from this information? We publish an acclaimed monthly
newsletter, Zeal Intelligence,
that details exactly what we are doing in terms of actual stock and options
trading based on all the lessons we have learned in our market research. Please
consider joining us each month for tactical trading details and more in our
premium Zeal Intelligence service at ... www.zealllc.com/subscribe.htm.

Thoughts, comments, or flames? Fire away at scottq@zealllc.com.
Depending on the volume of feedback I may not have time to respond personally,
but I will read all messages. Thanks!